15 December 2019
Appropriate margining practices should be in place with respect to all derivatives transactions that are not cleared by central counterparties (CCPs). This standard establishes minimum standards for margin requirements for non-centrally cleared derivatives. Such requirements reduce systemic risk with respect to non-standardised derivatives by reducing contagion and spillover risks and promoting central clearing.
The supervisory review process of the Framework is intended not only to ensure that banks have adequate capital and liquidity to support all the risks in their business, but also to encourage banks to develop and use better risk management techniques in monitoring and managing their risks.
The provision of meaningful information about common key risk metrics to market participants is a fundamental tenet of a sound banking system. It reduces information asymmetry and helps promote comparability of banks’ risk profiles within and across jurisdictions. Pillar 3 of the Basel framework aims to promote market discipline through regulatory disclosure requirements. These requirements enable market participants to access key information relating to a bank’s regulatory capital and risk exposures in order to increase transparency and confidence about a bank’s exposure to risk and the overall adequacy of its regulatory capital.
13 December 2019
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Ref no: 46/2019
The Financial Stability Board (FSB) Regional Consultative Group (RCG) for Sub-Saharan Africa met in Cape Town over the last two days at a meeting hosted by the South African Reserve Bank.
The meeting started with a discussion on recent global and regional macroeconomic and financial market developments and their implications for financial stability. The group discussed vulnerabilities created by low bond yields and increased holdings of lower quality debt and illiquid assets by investment funds. The group also noted increasing vulnerabilities from rising debt levels and non-performing loans in the region. Members emphasised the importance of adequate capital buffers for banks in response to these developments. The group also discussed the FSB’s recent publication on BigTech, and reviewed FinTech developments in the region. The group considered the economic and financial stability vulnerabilities created in the region by climate-related risks.
The group expressed support for a set of recommendations developed by a working group of FSB and RCG members, and adopted by the FSB Plenary in early November, to enhance the effectiveness of RCGs as an outreach and feedback mechanism.
Members discussed the FSB 2020 work programme, its contribution to the Saudi Arabian G20 Presidency and the issues that will be of most interest to authorities in the region. The main priorities for the FSB work programme are (i) addressing new and emerging vulnerabilities in the financial system, including through further work on how to harness the benefits of financial innovation while containing risks; (ii) finalising and operationalising post-crisis reforms; and (iii) monitoring the implementation and evaluating the effects of the reforms.
In addition, members discussed the FSB’s ongoing work to develop a toolkit of effective practices to assist financial institutions, supervisors and other relevant authorities, in supporting financial institutions before, during and after a cyber incident. There was also an exchange of views on the preliminary set of effective practices, including a summary of the survey responses by RCG members. The FSB will issue a consultative document on the toolkit in April 2020.
The meeting concluded with a discussion on the supervision of financial conglomerates. Members discussed trends towards increased consolidation of financial firms in the region and the approaches needed for effective supervision of these firms. In particular, group members noted the importance of continued dialogue amongst supervisory authorities.
The FSB RCG for Sub-Saharan Africa is co-chaired by Lesetja Kganyago, Governor, South African Reserve Bank and Ernest Addison, Governor, Bank of Ghana. Membership includes financial authorities from Angola, Botswana, Ghana, Kenya, Mauritius, Namibia, Nigeria, South Africa, Tanzania, Uganda and Zambia as well as the Central Bank of West African States (BCEAO) and the Bank of Central African States (BEAC). Permanent observers include the Committee of Central Bank Governors of the Southern African Development Community, and the East African Community.
The FSB has six Regional Consultative Groups, established under the FSB Charter, to bring together financial authorities from FSB member and non-member countries to exchange views on vulnerabilities affecting financial systems and on initiatives to promote financial stability.1 Typically, each Regional Consultative Group meets twice each year.
The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.
The FSB is chaired by Randal K. Quarles, Governor and Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.
Recommendation 1 IOSCO recommends that regulators use the following two-step analysis in assessing and monitoring leverage (“the Leverage Framework”). Step 1 uses measures of leverage to identify and analyse funds that may pose a risk to financial stability (see Recommendation 2). Step 2 involves further analysis of this sub-set of funds (see Recommendation 3). The goal of Step 1 is to provide regulators with a means of efficiently identifying those funds that are more likely to pose risks to the financial system using at least one notional exposure metric as further specified under Chapter Two of the Report. Step 1 provides an approach to how regulators using exposure metrics in various contexts and situations to filter and select a subset of investment funds for further analysis. Step 2 involves a risk-based analysis on the subset of funds identified in Step 1.
Recommendation 2 IOSCO recommends that regulators collect Gross National Exposure (GNE) or adjusted GNE broken down by asset classes, and long and short exposures. Regulators can at their discretion complement the GNE or adjusted GNE analysis with net exposure measures using either a rules-based or analytical-based netting and hedging approach. In their assessment of leverage in funds, which may pose significant leverage-related risks to the financial system, regulators may take action, when and to the extent they deem appropriate.
Recommendation 3 IOSCO recommends that in applying Step 2 of the Leverage Framework each regulator determines its own approach to defining appropriate risk-based measures to further analysing funds identified under Step 1, that may potentially pose significant leverage-related risks to the financial system. In conducting their Step 2 analysis, taking into account the fund’s characteristics and potential market risk, counterparty risk, or liquidity risks, as appropriate, regulators may consider using the leverage-related risk measures that are common across jurisdictions, as further detailed for illustration purposes and in a non-exhaustive manner in Appendix C of the Report.
Recommendation 4 IOSCO recommends that jurisdictions that do not already make the following leverage data publicly available do so, or provide this information to IOSCO for publication on a yearly basis:
GNE or adjusted GNE aggregated by asset class, including long and short exposures for funds assessed under Step 1;
Criteria of exclusion used to scope-out funds from Step 1 along with the aggregate amount of assets under management of funds not in scope in proportion to the total assets under management within their jurisdiction
9 December 2019
Press enquiries:
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Ref no: 45/2019
The Financial Stability Board (FSB) today published two reports that consider the financial stability implications from an increasing offering of financial services by BigTech firms, and the adoption of cloud computing and data services across a range of functions at financial institutions.
BigTech in finance: Market developments and potential financial stability implications
The entry of BigTech firms into finance has numerous benefits, including the potential for greater innovation, diversification and efficiency in the provision of financial services. They can also contribute to financial inclusion, particularly in emerging markets and developing economies, and may facilitate access to financial markets for small and medium-sized enterprises.
However, BigTech firms may also pose risks to financial stability. Some risks are similar to those from financial firms more broadly, stemming from leverage, maturity transformation and liquidity mismatches, as well as operational risks.
The financial services offerings of BigTech firms could grow quickly given their significant resources and widespread access to customer data, which could be self-reinforcing via network effects. An overarching consideration is that a small number of BigTech firms may in the future come to dominate, rather than diversify, the provision of certain financial services in some jurisdictions.
A range of issues arise for policymakers, including with respect to additional financial regulation and/or oversight. Regulators and supervisors also need to be mindful of the resilience and the viability of the business models of incumbent firms given interlinkages with, and competition from, BigTech firms.
Third-party dependencies in cloud services: Considerations on financial stability implications
Financial institutions have used a range of third-party services for decades, and many jurisdictions have in place supervisory policies around such services. Yet recently, the adoption of cloud computing and data services across a range of functions at financial institutions raises new financial stability implications.
Cloud services may present a number of benefits over existing technology. By creating geographically dispersed infrastructure and investing heavily in security, cloud service providers may offer significant improvements in resilience for individual institutions and allow them to scale more quickly and to operate more flexibly. Economies of scale may also result in lower costs to clients.
However, there could be issues for financial institutions that use third-party service providers due to operational, governance and oversight considerations, particularly in a cross-border context and linked to the potential concentration of those providers. This may result in a reduction in the ability of financial institutions and authorities to assess whether a service is being delivered in line with legal and regulatory obligations.
The report concludes that there do not appear to be immediate financial stability risks stemming from the use of cloud services by financial institutions. However, there may be merit in further discussion among authorities to assess: (i) the adequacy of regulatory standards and supervisory practices for outsourcing arrangements; (ii) the ability to coordinate and cooperate, and possibly share information among them when considering cloud services used by financial institutions; and (iii) the current standardisation efforts to ensure interoperability and data portability in cloud environments.
The digitalisation of finance has the potential to significantly change the functioning of the global financial system. As part of its ongoing work to analyse structural changes in the financial system, the FSB has already published reports on decentralised financial technologies, crypto-assets, FinTech and market structure in financial services, artificial intelligence and machine learning in financial services, and FinTech credit. It will continue to monitor digitalisation trends and their financial stability implications, in order to assist in harnessing the benefits while mitigating risks.
The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.
The FSB is chaired by Randal K. Quarles, Governor and Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.
This report considers the financial stability implications of BigTech firms as they expand into offering financial services. Their entry into finance has numerous benefits, including the potential for greater innovation, diversification and efficiency in the provision of financial services. They can also contribute to financial inclusion, particularly in emerging markets and developing economies, and may facilitate access to financial markets for small and medium-sized enterprises.
However, BigTech firms may also pose risks to financial stability. Some risks are similar to those from financial firms more broadly, stemming from leverage, maturity transformation and liquidity mismatches, as well as operational risks.
The financial services offerings of BigTech firms could grow quickly given their significant resources and widespread access to customer data, which could be self-reinforcing via network effects. An overarching consideration is that a small number of BigTech firms may in the future come to dominate, rather than diversify, the provision of certain financial services in some jurisdictions.
A range of issues arise for policymakers, including with respect to additional financial regulation and/or oversight. Regulators and supervisors also need to be mindful of the resilience and the viability of the business models of incumbent firms given interlinkages with, and competition from, BigTech firms.
With the adoption of cloud computing and data services across a range of functions at financial institutions, there are new financial stability implications for authorities to consider. Financial institutions have used a range of third-party services for decades, and many jurisdictions have in place supervisory policies around such services. Yet recently, the adoption of cloud computing and data services across a range of functions at financial institutions raises new financial stability implications.
Cloud services may present a number of benefits over existing technology. By creating geographically dispersed infrastructure and investing heavily in security, cloud service providers may offer significant improvements in resilience for individual institutions and allow them to scale more quickly and to operate more flexibly. Economies of scale may also result in lower costs to clients.
However, there could be issues for financial institutions that use third-party service providers due to operational, governance and oversight considerations, particularly in a cross-border context and linked to the potential concentration of those providers. This may result in a reduction in the ability of financial institutions and authorities to assess whether a service is being delivered in line with legal and regulatory obligations.
This report concludes that there do not appear to be immediate financial stability risks stemming from the use of cloud services by financial institutions. However, there may be merit in further discussion among authorities to assess: (i) the adequacy of regulatory standards and supervisory practices for outsourcing arrangements; (ii) the ability to coordinate and cooperate, and possibly share information among them when considering cloud services used by financial institutions; and (iii) the current standardisation efforts to ensure interoperability and data portability in cloud environments.
3 December 2019
FSB Vice Chair Klaas Knot sets out the conclusions from the FSB’s evaluation of the effects of the post-crisis financial regulatory reforms on the financing of small and medium-sized enterprises. The evaluation was part of a broader FSB examination of the effects of the G20 regulatory reforms on financial intermediation.
29 November 2019 | PDF full text (2 MB)
This evaluation examines the effects of the post-crisis G20 reforms on the financing of small and medium-sized enterprise (SMEs). As part of a broader FSB examination of the effects of the reforms on financial intermediation, it is motivated by the need to better understand the effects of the reforms on the financing of real economic activity and their contribution to the G20 objective of strong, sustainable, balanced and inclusive economic growth.
Given that banks are the primary providers of external SME financing, the most relevant reforms implemented to date are the initial Basel III capital and liquidity requirements agreed in 2010. These were the focus of both qualitative and quantitative analysis. Consistent with the FSB evaluation framework, other reforms relevant for SME financing that are at an earlier implementation stage or that are national in nature were only analysed qualitatively.
For the reforms in scope, the evaluation finds no material and persistent negative effects on SME financing in general, although there is some differentiation across jurisdictions. There is some evidence that the more stringent risk-based capital requirements under Basel III slowed the pace and in some jurisdictions tightened the conditions of SME lending at those banks that were least capitalised ex ante relative to other banks. These effects are not homogeneous across jurisdictions and they are generally found to be temporary. The evaluation also provides some evidence for a reallocation of bank lending towards more creditworthy firms after the introduction of reforms, but this effect is not specific to SMEs.
SME lending growth has resumed in recent years, although volumes remain below the pre-crisis level in some jurisdictions. Access to external finance for SMEs also appears to have improved, particularly in advanced economies. Stakeholder feedback suggests that SME financing trends are largely driven by factors other than financial regulation, such as public policies and macroeconomic conditions.
Any potential costs found in this evaluation, which appear limited and transitory, should be framed against the wider financial stability benefits of the G20 reforms estimated in ex ante impact assessments. These studies generally found significant net overall benefits in terms of reducing the likelihood and severity (lost output) of financial crises.
The FSB also published today an overview of responses to its public consultation, and a Technical Appendix providing more information on the empirical analysis that was carried out as part of the evaluation.
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